California Bankruptcy Exemptions FAQ

Bankruptcy exemptions are laws that protect certain property from being liquidated by the bankruptcy trustee to pay creditors. Under 11 U.S.C. § 522, exemptions allow you to keep essential assets like your home, car, clothing, household goods, and retirement accounts through bankruptcy. The concept recognizes that debtors need certain property to maintain basic living standards and make a fresh start. Without exemptions, bankruptcy would leave filers destitute, defeating the bankruptcy system's rehabilitative purpose.

In Chapter 7 bankruptcy, exemptions directly determine what you keep versus what the trustee can sell for creditor benefit. Assets with equity exceeding exemptions become part of the bankruptcy estate under 11 U.S.C. § 541 and may be liquidated. In Chapter 13 bankruptcy, while you keep all property regardless of exemptions, they still matter because your repayment plan must pay unsecured creditors at least what they would receive in Chapter 7 under the "best interests of creditors" test in 11 U.S.C. § 1325(a)(4). This means non-exempt equity determines your minimum plan payment.

California law provides two mutually exclusive exemption systems under CCP § 703.140(a): System 1 (CCP § 704.010 et seq., often called the "704 exemptions") and System 2 (CCP § 703.140(b), often called the "703 exemptions"). You must choose one system when filing and cannot mix exemptions from both. This unique dual-system structure—shared only with a few other states—requires careful analysis to select the system that best protects your particular assets. The choice is irrevocable once your bankruptcy case is filed, making it one of the most critical strategic decisions in California bankruptcy planning.

California offers two mutually exclusive exemption systems and you must choose one—you cannot mix exemptions from both under CCP § 703.140(a). System 1 (CCP § 704.010 et seq.) provides a generous homestead exemption of $300,000 to $600,000 depending on age, disability, and income under CCP § 704.730, making it ideal for homeowners. However, System 1 provides limited protection for other assets: only $3,325 for motor vehicles under § 704.010, $8,725 for jewelry under § 704.040, $1,788 for bank deposits under § 704.220, and specific dollar amounts for tools of trade, household items, and other property categories.

System 2 (CCP § 703.140(b)) substantially mirrors the federal bankruptcy exemptions in 11 U.S.C. § 522(d) and provides a smaller homestead of only $29,275 under § 703.140(b)(1). However, System 2 includes a valuable wildcard exemption under § 703.140(b)(5): $1,700 base plus up to $17,075 of any unused portion of the homestead exemption. If you don't own a home or have no home equity, you can use the full $29,275 homestead as wildcard, plus the $1,700 base, totaling $18,775 that can protect any property—cash, bank accounts, tax refunds, stocks, cryptocurrency, or any other assets. System 2 also provides $6,375 for motor vehicles (§ 703.140(b)(2)), $15,575 aggregate for household goods (§ 703.140(b)(3)), and $1,700 for jewelry (§ 703.140(b)(4)).

The strategic difference is clear: System 1 generally benefits homeowners with significant equity who need maximum homestead protection and have minimal other assets. System 2 benefits renters or those with minimal home equity who need to protect cash, investments, vehicles, or valuable personal property through the flexible wildcard exemption. For married couples filing jointly, each spouse gets their own set of exemptions, effectively doubling the protection (e.g., $600,000-$1,200,000 homestead in System 1, or up to $37,550 wildcard in System 2). California bankruptcy attorneys carefully inventory all assets and calculate exemption coverage under both systems to determine optimal strategy.

California's homestead exemption under CCP § 704.730 protects equity in your primary residence from creditors in bankruptcy. Unlike the old homestead declaration system (repealed in 2020), the current automatic homestead exemption requires no recording or declaration—it applies automatically to your principal residence. The exemption amount varies based on specific criteria established by § 704.730(a)(1)-(3): $300,000 for most individuals; $450,000 if the judgment debtor or spouse is age 65 or older, disabled, or age 55 or older with annual gross income not exceeding $35,950 (adjusted annually for inflation per § 704.730(b)); and $600,000 if the judgment debtor or spouse is age 65 or older with annual gross income not exceeding $35,950.

To calculate your protected equity, determine your home's current fair market value through appraisal or comparative market analysis, subtract all liens and mortgages (first mortgage, second mortgage, HELOCs, tax liens, mechanic's liens, any recorded liens), and compare the resulting equity to your applicable exemption amount. For example, if your home is worth $700,000 with a $450,000 mortgage, you have $250,000 equity—fully protected under the $300,000 base exemption. But if you have $500,000 equity, only $300,000 (or $450,000/$600,000 if you qualify) is exempt, leaving the remainder vulnerable in Chapter 7.

Important limitations apply: the homestead only protects your principal residence where you reside on the date of filing or within the prior 6 months. It doesn't protect investment properties, vacation homes, or properties you don't occupy. Under 11 U.S.C. § 522(p), if you acquired your home within 1,215 days (about 40 months) before filing, your homestead exemption may be capped at $189,050 (adjusted for inflation) to prevent abuse. System 2's homestead exemption is only $29,275 under CCP § 703.140(b)(1), making System 1 far superior for homeowners with equity, though System 2's wildcard can supplement if you have minimal home equity.

The wildcard exemption, available only in System 2 under CCP § 703.140(b)(5), is one of California bankruptcy's most valuable and flexible protections. It allows you to protect any property of your choosing up to $1,700, plus up to $17,075 of any unused portion of the homestead exemption under § 703.140(b)(1). The critical advantage is flexibility—unlike specific exemptions limited to particular property categories, the wildcard can protect anything: cash in your wallet, bank account balances, cryptocurrency, stocks and bonds, tax refunds, personal injury settlements, business interests, valuable collectibles, or any other asset.

Here's how the calculation works: System 2 provides a $29,275 homestead exemption. If you don't own a home, you can't use the homestead for real estate, but you can convert it to wildcard protection. Take the full $29,275 unused homestead and add the $1,700 base wildcard for a total of $18,775 (the statute caps this combined amount at $17,075 + $1,700 = $18,775). If you own a home but have minimal equity, you can use the unused portion. For example, with $10,000 home equity, you use $10,000 of homestead for the home and have $19,275 remaining, allowing up to $17,075 wildcard plus $1,700 base for $18,775 to protect other assets.

The wildcard is particularly valuable for: renters with no homestead needs who can apply the full $18,775 to cash or personal property; self-employed individuals with business assets, equipment, or accounts receivable exceeding System 1's $8,725 tools of trade limit; individuals with tax refunds, especially Earned Income Tax Credits that can be substantial; those with recent inheritances or lawsuit settlements in bank accounts; cryptocurrency holders with significant digital asset balances; and people with valuable collections, jewelry, or personal property exceeding System 1's specific category limits. Married couples filing jointly each get a wildcard, potentially protecting up to $37,550 in otherwise non-exempt property. This makes System 2 the preferred choice for asset-rich but non-homeowner debtors.

Choosing the right exemption system requires a comprehensive asset inventory and strategic analysis. Under CCP § 703.140(a), you must elect one system and cannot mix exemptions. Start by listing all assets with current fair market values and any liens: real estate (home, investment properties), vehicles, bank accounts and cash, retirement accounts, household goods and personal effects, jewelry and collectibles, business interests and equipment, tax refunds, and any other property. Calculate equity by subtracting liens from values.

Use System 1 (CCP § 704.010 et seq.) if you own a home with significant equity ($300,000-$600,000 depending on your age, income, and disability status under § 704.730), have minimal cash or bank deposits (under $1,788), limited vehicle equity (under $3,325), limited jewelry (under $8,725), and your other personal property fits within System 1's specific category limits. System 1 is optimal for homeowners who need maximum real estate protection and have modest other assets. The trade-off is rigid category limits—you cannot shift unused homestead protection to other property.

Use System 2 (CCP § 703.140(b)) if you don't own a home or have minimal home equity (under $29,275), have significant cash, bank deposits, or tax refunds exceeding $1,788, own vehicles worth more than $3,325 equity (System 2 provides $6,375), have valuable jewelry, collections, or personal property exceeding System 1 limits, need flexibility through the wildcard exemption (up to $18,775) to protect various assets, or are self-employed with business assets exceeding $8,725. System 2 is preferred for renters, those with liquid assets, and individuals with diverse valuable property requiring flexible protection.

Special considerations: married couples filing jointly double exemptions in either system. Timing matters—calculate values as of the petition filing date. Some assets like retirement accounts are protected under federal law (11 U.S.C. § 522(b)(3)(C)) regardless of which system you choose. When in doubt, prepare detailed exemption schedules under both systems and calculate total protected value—choose the system that protects more of your assets. California bankruptcy attorneys routinely perform this comparative analysis. Remember, the choice is irrevocable once filed, and choosing wrong could result in property loss in Chapter 7 or higher plan payments in Chapter 13.

Retirement accounts receive robust protection in bankruptcy through both federal and California law, regardless of which exemption system you choose. Under 11 U.S.C. § 522(b)(3)(C) and (d)(12), qualified ERISA plans are fully exempt with no dollar limit. This includes employer-sponsored 401(k) plans, 403(b) plans for educators and nonprofit employees, 457 deferred compensation plans for government employees, traditional pension plans (defined benefit plans), profit-sharing plans, money purchase plans, and employee stock ownership plans (ESOPs). There is no cap on these exemptions—accounts worth millions are fully protected.

Traditional IRAs, Roth IRAs, SEP-IRAs, and SIMPLE IRAs are exempt up to $1,512,350 (as of 2022, adjusted every 3 years for inflation) per person under 11 U.S.C. § 522(n). This aggregate limit applies to all IRAs combined. Importantly, inherited IRAs are not protected under federal bankruptcy exemptions following the Supreme Court's decision in Clark v. Rameker, 573 U.S. 122 (2014), which held inherited IRAs aren't "retirement funds" under § 522(b)(3)(C) because beneficiaries can withdraw without penalty regardless of age. However, beneficiaries who are surviving spouses may roll inherited IRAs into their own IRAs, which would then be protected.

California law provides additional protection under CCP § 704.115 for private retirement plans and contributions, and § 704.110-704.113 for public retirement systems including CalPERS, CalSTRS, and county and city retirement systems. These state exemptions apply regardless of whether you choose System 1 or System 2, as they are separate statutory protections. Rollover IRAs (funds rolled from 401(k) to IRA) retain unlimited exemption for amounts attributable to the ERISA plan under Patterson v. Shumate, 504 U.S. 753 (1992). Recent contributions made in contemplation of bankruptcy may be scrutinized under 11 U.S.C. § 522(o), which limits exemptions for contributions made within 1,215 days of filing. Cash value life insurance with retirement features may also be protected under CCP § 704.100. Planning tip: maximize retirement contributions before bankruptcy rather than holding cash in vulnerable bank accounts.

Yes, California exemptions protect vehicle equity up to specific limits, though the protected amount depends on which exemption system you choose. System 1 under CCP § 704.010 exempts $3,325 in equity in one motor vehicle. System 2 under CCP § 703.140(b)(2) exempts $6,375 in equity in one motor vehicle—nearly double System 1's protection. Additionally, System 2 allows you to apply the wildcard exemption (up to $18,775 if you have no home equity) to protect additional vehicle equity beyond the $6,375 base exemption, potentially protecting over $25,000 in vehicle equity for renters.

To calculate your vehicle equity, determine fair market value using resources like Kelley Blue Book (use the "private party value," not retail or trade-in), N.A.D.A. guides, or recent comparable sales. Subtract all loans, liens, and security interests including auto loans, title loans, mechanic's liens, or any recorded interests. The result is your equity. For example, if your car is worth $15,000 with a $10,000 loan, you have $5,000 equity. Under System 1, $3,325 is exempt and $1,675 is vulnerable. Under System 2, $5,000 is fully protected within the $6,375 exemption.

If you have an auto loan and are current on payments, you typically keep the vehicle regardless of equity by continuing payments through reaffirmation under 11 U.S.C. § 524(c), redemption under § 722 (paying fair market value in lump sum), or "ride through" (continuing payments without reaffirmation, though creditors may object). If your equity exceeds exemptions and you own the vehicle free and clear, the Chapter 7 trustee may sell it, pay you your exemption amount, and distribute the remainder to creditors. However, trustees often abandon vehicles with minimal non-exempt equity because sale costs (auction fees, trustee commission, storage) may exceed the net benefit to creditors. For multiple vehicles, only one qualifies for the motor vehicle exemption; others must be protected through wildcard (System 2 only) or may be vulnerable. Commercial vehicles or tools of trade vehicles might qualify for separate protection under CCP § 704.060 (System 1) or § 703.140(b)(6) (System 2).

California exemptions protect extensive personal property, though specific items and dollar limits vary between System 1 and System 2. System 1 (CCP § 704.010 et seq.) includes specific category exemptions: ordinary household furnishings, appliances, provisions, wearing apparel, and other personal effects ordinarily used by you and your dependents (§ 704.020—no dollar limit, but items must be "ordinary"); jewelry, heirlooms, and works of art with equity up to $8,725 total (§ 704.040); health aids, prosthetic devices, and prescribed health items without limit (§ 704.050); materials to repair or improve real or personal property up to $3,750 (§ 704.030); and burial plots without limit (§ 704.200).

System 1 also protects tools of trade under CCP § 704.060: tools, implements, instruments, materials, uniforms, books, equipment, furnishings, one commercial vehicle, and other personal property reasonably necessary for your trade, business, or profession, with equity up to $8,725 ($18,450 if you and your spouse are in the same occupation and filing jointly). Bank deposits are protected only up to $1,788 (§ 704.220), making System 1 vulnerable for those with significant cash savings. System 1 provides unlimited exemptions for public benefits including Social Security, SSI, unemployment, disability, workers' compensation, and veterans benefits (§ 704.110-704.170).

System 2 (CCP § 703.140(b)) provides aggregate limits: $15,575 aggregate value of household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, limited to $775 per individual item (§ 703.140(b)(3)); jewelry up to $1,700 total (§ 703.140(b)(4)); professionally prescribed health aids without limit (§ 703.140(b)(9)); tools of trade up to $8,725 (§ 703.140(b)(6)); and the flexible wildcard exemption (§ 703.140(b)(5)) up to $18,775 that can protect any property including cash, electronics, collectibles, or other valuable items. System 2's aggregate approach for household goods is more flexible than System 1's requirement that items be "ordinary." Both systems protect common household items like furniture, TVs, computers, kitchen appliances, clothing, and basic personal effects. For valuable collections (art, stamps, coins), jewelry exceeding limits, or electronics, System 2's wildcard often provides better protection.

California provides extensive protection for life insurance policies, benefits, and public assistance through both exemption systems. Under System 1, CCP § 704.100 fully exempts unmatured life insurance policies (policies that haven't paid out due to death) and their loan value, except credit life insurance policies. This means term life policies, whole life policies, universal life policies, and the cash value accumulated in permanent policies are fully protected regardless of amount, allowing you to borrow against policies or keep them through bankruptcy without affecting the bankruptcy estate.

The proceeds from matured life insurance policies (death benefits paid to you as beneficiary) are exempt to the extent reasonably necessary for the support of you and your dependents under CCP § 704.100(c). This is a need-based test—if you receive $100,000 in life insurance proceeds but need only $30,000 for reasonable support, the excess $70,000 could be vulnerable in Chapter 7. However, courts interpret "reasonably necessary" broadly, considering debts, living expenses, and future needs. Disability insurance benefits and health insurance benefits are fully exempt under § 704.130 without dollar limits.

System 1 provides unlimited exemptions for various public benefits under CCP § 704.110-704.170: Social Security benefits (§ 704.110(a)(1)), Supplemental Security Income (SSI) (§ 704.110(a)(2)), veterans' benefits (§ 704.110(a)(3)), unemployment insurance benefits (§ 704.120), workers' compensation awards and claims (§ 704.160), disability benefits (§ 704.130), CalWORKs and other public assistance (§ 704.170), and aid to families with dependent children (§ 704.170). These exemptions apply even after benefits are deposited in bank accounts, though comingling with non-exempt funds can create tracing issues—best practice is maintaining separate accounts for exempt benefits.

System 2 provides similar protections under CCP § 703.140(b)(10)-(11): unmatured life insurance contracts and their loan values (except credit insurance), unemployment benefits, Social Security, public assistance, veterans' benefits, and disability benefits. Both systems protect these benefit types comprehensively. Important limitation: life insurance proceeds received more than a reasonable time before filing (e.g., 6+ months earlier) may lose exempt status if converted to non-exempt property like expensive cars or luxury items, absent continued need. California bankruptcy courts scrutinize luxury spending of insurance proceeds shortly before filing as potential fraud under 11 U.S.C. § 727(a)(2).

If your property's equity exceeds applicable exemption limits, the outcome depends on which bankruptcy chapter you file and the amount of non-exempt equity. In Chapter 7, property with non-exempt equity becomes property of the bankruptcy estate under 11 U.S.C. § 541, and the trustee has authority to liquidate it under § 704(a)(1). The trustee will sell the property, pay off any liens, give you your exempt amount, pay sale costs (realtor fees for homes, auction costs for vehicles, trustee's statutory commission of up to 25% on distributions), and distribute the remainder to creditors as a dividend.

For example, if you own a home worth $500,000 with a $200,000 mortgage, you have $300,000 equity. If you're eligible for the $300,000 homestead exemption (base amount under CCP § 704.730), your equity is fully protected. But if your exemption is only $29,275 (System 2), you have $270,725 non-exempt equity. The trustee could sell your home, pay the $200,000 mortgage, give you $29,275, deduct sale costs (approximately 8-10% or $24,000-$30,000), and distribute the remaining $240,000+ to creditors. In practice, trustees often abandon assets with minimal non-exempt equity (generally under $5,000-$10,000 after sale costs) because the administrative burden and costs exceed benefits to creditors.

You have several options when facing non-exempt equity: convert to Chapter 13, where you keep all property but must pay unsecured creditors at least the non-exempt equity value through your repayment plan under the best interests test in 11 U.S.C. § 1325(a)(4); negotiate to buy back the non-exempt equity by paying the trustee a lump sum (often discounted to avoid sale costs); wait for the trustee to abandon the property as burdensome under § 554, which occurs in many consumer cases; or allow the sale and take your exemption proceeds. Some debtors strategically spend down non-exempt equity on exempt assets before filing (e.g., paying down mortgage, purchasing tools of trade, funding retirement accounts), though recent conversions may be scrutinized as fraudulent transfers under 11 U.S.C. § 548 or California fraudulent transfer laws if done in contemplation of bankruptcy.

In Chapter 13, exemptions work differently—you keep all property regardless of equity under 11 U.S.C. § 1306(b), but your plan must pay unsecured creditors at least what they would receive in Chapter 7. Calculate non-exempt equity, subtract estimated Chapter 7 sale costs and trustee fees, and the remainder is the minimum you must pay unsecured creditors over 3-5 years. For example, $50,000 non-exempt equity minus $8,000 costs equals $42,000 minimum to unsecured creditors, or about $700/month over 60 months. This makes Chapter 13 attractive for those with significant non-exempt assets who have income to fund plans but don't want to lose property.

No, California is one of approximately 19 "opt-out" states that have prohibited the use of federal bankruptcy exemptions. Under 11 U.S.C. § 522(b)(2), states may pass legislation preventing debtors from using the federal exemptions listed in 11 U.S.C. § 522(d). California exercised this option through CCP § 703.130, requiring California debtors to use state exemptions rather than federal exemptions. You must choose between California's System 1 (CCP § 704.010 et seq.) and System 2 (CCP § 703.140(b))—you cannot elect the federal exemptions in § 522(d).

However, California's System 2 exemptions under CCP § 703.140(b) substantially mirror and incorporate the federal exemptions from § 522(d). When Congress adjusts federal exemption amounts for inflation under 11 U.S.C. § 104, California's System 2 exemptions are adjusted to match per CCP § 703.150. This means System 2 provides essentially the same protection as federal exemptions, including the homestead ($29,275), motor vehicle ($6,375), wildcard ($1,700 plus up to $17,075 unused homestead), household goods ($15,575 aggregate), jewelry ($1,700), tools of trade ($8,725), and various benefit exemptions. The practical effect is that California debtors choosing System 2 receive federal-equivalent protection despite the opt-out.

To use California exemptions, you must have been domiciled in California for at least 730 days (2 years) immediately preceding your bankruptcy filing under 11 U.S.C. § 522(b)(3)(A). If you moved to California more recently, you use the exemptions from the state where you lived for at least 180 days during the 730-day period immediately before the 2-year period preceding your filing—a complex "look-back" rule. For example, if you file bankruptcy on January 1, 2025, and moved to California on July 1, 2023 (18 months ago), you use exemptions from the state where you lived for most of the 180 days during the period from January 1, 2021 to January 1, 2023. If that state has also opted out of federal exemptions, you use that state's exemptions. If that state hasn't opted out or you didn't live anywhere for 180 days during the look-back period, you may use federal exemptions under § 522(b)(3).